The economic data out of the UK has remained stubbornly bleak in recent months and there are signs the worse could be yet to come. The UK economy grew just 0.1 per cent in Q3 2024 despite, or because of, a widely criticised budget aimed at kickstarting the stalling British economy. The figures managed to underperform analyst’s measly expectations of 0.2 per cent growth, as manufacturing output and exports fell sharply. But the latest data, anaemic though it is, may paint a prettier picture than the reality belies. Because the UK population has been expanding at a historic rate, wealth per head is actually decreasing and has been for a long time. With the UK government now poised to slash immigration, could kicking away this crutch result in a recession?

Stagflation fears amid stubborn inflation  

The latest inflation data showed the CPI up 2.6 per cent in 2024, above the Bank of England’s 2 per cent target. Higher prices have kicked the prospect of an interest rate cut into 2025. The chief UK economist at Capital Economics, Paul Dales, told Bloomberg:

“[T]here is almost no chance of the Bank of England delivering an early Christmas present with another interest rate cut,”

The outlet reported that the disappointing CPI numbers had sparked fear of stagflation, a situation in which prices surge while the economy flatlines, reporting that:

“The November CPI print brings back memories of the cost-of-living crisis. This was the first back-to-back increase in the annual inflation rate in over two years when price growth peaked above 11%. Goods inflation — the main driver of the post-Covid price spike — rose to 0.4%, turning positive for the first time since March,”

A senior economist formerly of the BOE warned of this kind of scenario last month. DeAnne Julius, a former member of the BOE Monetary Policy Committee warned a hike in national insurance, increases to the minimum wage and rising business rates could result in “[L]ower output, higher unemployment and cost-push inflation,” in a November article for the FT.

The Telegraph’s Economics Reporter was more scathing, writing that a “Toxic mix of prices rises, low growth and supply constraints threatens to derail recovery.”

Budget blamed for economic woes

The incumbent Labour government were bequeathed a dismal economic inheritance. Previous governments of various stripes had allowed debt to balloon, productivity to stagnate and real wages to fall. Historic levels of migration were used to push GDP up, while wealth per head fell and infrastructure became run down.

There is no doubt that there is no easy fix to the challenge the British economy represents. That daunting task has fallen to Rachel Reeves, whose Autumn budget was designed to act as an economic course correction. But business leaders, economists and observers have been almost unanimous in saying the interventions have only aggravated matters.

The British High Street shoe retailer, Shoe Zone, announced it would be closing a number of its more than 300 UK stores, blaming the Autumn budget, which they said would render many of them unviable. The retailer said increases to employer’s national insurance contributions and the minimum wage would result in stores being forced to close. It comes after the chancellor announced employer’s NICs would rise from 13.8 per cent to 15 per cent, a move the governor of the BoE said was the ‘biggest issue’ facing the economy.

The news came after a joint warning from more than 70 major British businesses, including the likes of Tesco and Sainsbury’s, that budget measures announced in the government’s October budget would result in job losses and price hikes. As ThisisMoney reported:

“Businesses have said the raft of Budget policy measures, which also included packaging levies and increases to the national minimum wage, will cost the industry £7.06 billion a year.

“The letter, arranged by the British Retail Consortium, was also signed by household names including Amazon, Aldi, Boots, B&Q, Currys, Greggs, JD Sports, Marks & Spencer, Next and Primark.

“The letter read: We appreciate Government’s focus on improving the fiscal situation and investing in public services; we also recognise the role businesses have in supporting this.

“But the sheer scale of new costs and the speed with which they occur create a cumulative burden that will make job losses inevitable, and higher prices a certainty.”

Will the UK go into recession?

The UK economy shrank in September and October, prompting speculation over an emergency tax-raising budget in the Spring of 2025. The government’s economic plans rely on growth, but those plans could now be jeopardised by further disappointing growth numbers and possible downgrades to growth forecasts. A recession is typically defined by two consecutive quarters of GDP decline and if December’s economic activity fails to put Q4 back in the red, then all eyes will be on Q1 2025 to see if the UK has slumped into a technical recession. Some commentators now believe the risk of recession is very real.

Economists are reportedly sounding the alarm over Britain’s stagnating economy, which now threatens the prospect of recession. Chris Williamson of S&P Market Intelligence said “Companies are giving a clear ‘thumbs down’ to the policies announced in the Budget, especially the planned increase in employers’ National Insurance contributions.” In comments to The Telegraph.

It comes as Sterling fell to a seven-month low against the dollar and hopes of a rate cut were dashed. Though the consensus among economists continues to be that some growth is more likely than contraction, there are now real fears that the economy will shrink in the final quarter of 2024.

The warnings come following a new survey which showed British businesses are shedding jobs at the fastest rate since 2009. A December poll by S&P Global revealed private sector employment was in sharp decline as a result of a “[S]teep and accelerated decrease in new orders in the manufacturing sector.” The survey also found that “Some firms also noted that forthcoming increases in employers’ National Insurance contributions had encouraged cutbacks to working hours and longer-term efforts to restructure workforces.”

While it makes for grim reading – the gloomy economic tea leaves don’t yet spell a recession – but they do at least point toward a dismal economic environment in the short term. The OECD forecast still puts UK growth in 2025 at 1.7 per cent, and while a forecast is not any kind of certain prediction, it remains among one of the more reliable indicators we can turn toward.

Britain’s economy remains in dire straits

The UK economy continues to suffer from anaemic growth, with recent data showing just 0.1 per cent growth in Q3 2024. This stagnation is underpinned by several structural challenges that have persisted over time.

Contributing to this economic lethargy is the persistent productivity slowdown. Research from the London School of Economics highlights that the UK’s productivity lags behind that of France, Germany, and the United States, primarily due to chronic underinvestment in capital and skills. This underinvestment hampers the adoption of productivity-enhancing practices across firms and regions, further entrenching economic disparities.

Bad governance and political instability have exacerbated these issues. The Institute for Fiscal Studies notes that low investment, coupled with policy mistakes, has impeded growth more in the UK than in many comparable nations. Such an environment fosters uncertainty, deterring both domestic and foreign investments essential for economic dynamism.

The recent Autumn Budget, intended as a corrective measure, has faced criticism for potentially aggravating economic challenges.

Proposed increases in employer national insurance contributions and the minimum wage have sparked ire from businesses about rising operational costs, which could lead to job cuts and higher consumer prices. Notably, over 70 major British companies have warned that these measures may result in job losses and price hikes, costing the industry £7.06 billion annually. While the UK economy might not be on the verge of entering recession – although the possibility cannot be ruled out – it continues to post weak performances. Turning the ship around will be a long-term project, involving a coherent and sustained strategy focused on enhancing productivity through investment in capital and skills, fostering policy stability, and creating an environment conducive to innovation and growth. Without such a concerted effort, the risk of continued economic stagnation and potential recession looms large.